White House Ratchets Up Pressure To Pass Student Loan Deal

The White House is scrambling to keep a preliminary deal on student loan interest rates from imploding, people familiar with the efforts said Tuesday, pressuring reluctant lawmakers and student advocates to support the proposal while publicly downplaying projections that borrowing costs will rise in as little as two years.

Administration officials have told some Senate Democrats that if they don’t support the deal, and it collapses, President Barack Obama would publicly blame them for allowing borrowing costs to rise for some students, congressional aides said.

Officials at the Senate Democratic Policy Committee and in the White House Office of Public Engagement have pressed skeptical student groups to either support the deal or soften their criticism, according to people who have received the calls. Recipients of the pressure campaign said they felt threatened to back the deal or risk being excluded from future policy discussions.

The Obama administration’s furious lobbying comes as undergraduate students from low- and moderate-income households are set to pay 6.8 percent interest for new Stafford loans, double the 3.4 percent interest they paid for the same loans during the last two school years. The automatic doubling on July 1 — the result of past congressional compromises — has led to numerous proposals meant to reduce costs for this fall’s borrowers.

A deal reached last week by a small group of senators that is supported by the White House and touted as a bipartisan compromise would transform the federal government’s $1 trillion student loan program by permanently pegging interest rates on new loans to the government’s cost to borrow over a 10-year period. Under the deal, most borrowers would temporarily pay less to borrow from the federal government to finance a college education than under existing law. Rates would be lower this coming school year, leading to thousands of dollars in savings.

“We’re all just really, really pleased,” U.S. Education Secretary Arne Duncan said of the pending Senate deal.

Graduate students and parents of undergraduate borrowers are forecast to pay more relative to existing law beginning as early as 2015, because interest rates on 10-year Treasury notes rise as the economy improves. The average undergraduate may pay more to borrow as early as 2016.

The government is forecast to generate $184 billion in profit off new loans to college students and their families this year through 2023, according to the nonpartisan Congressional Budget Office. The CBO estimates the bipartisan compromise will generate an additional $715 million in Education Department profit, leading to an overall government profit of roughly $185 billion over the next decade compared with current law.

The estimated increase in government profit has led several Senate Democrats, including Elizabeth Warren of Massachusetts and Jack Reed of Rhode Island, to buck the White House and instead back an alternative plan that would ensure loan interest rates stay low, even when broader interest rates rise.

Last week, Warren said government-generated profit off student borrowers and their families is “morally wrong” and “obscene.” The CBO projects that the U.S. government will record a $51 billion profit off borrowers this year.

The government profit projections have galvanized opposition to the deal, frustrating Obama administration officials who wish to quickly move on to other issues.

Student advocates and lawmakers who want lower borrowing costs are simply pointing to government profit projections to support their arguments for why current and projected rates under the bipartisan deal are still too high.

On Tuesday, Duncan disputed the use of the word “profit” to characterize the positive difference between the government’s revenue and costs.

Student advocates such as the U.S. Public Interest Research Group are among the groups that have seized on the profit issue to fight the White House-backed proposal. U.S. PIRG also opposes the deal because future college students, such as 16-year-old Dakota Friend, would pay more to finance a college education in order to keep costs low for current students, such as Dakota’s sister, Briana Mullen, an incoming junior and history major at the University of California Berkeley.

Undergraduates this fall would pay 3.86 percent under the deal to borrow from the federal government through the Stafford loan program. By 2016, they would be estimated to pay 6.08 percent, according to an average of projections from the CBO, White House Office of Management and Budget, and Blue Chip consensus of private forecasters.

The 2016 rate may exceed the average interest rate carried by subsidized and unsubsidized Stafford loans during the most recent school year. Subsidized Stafford loans, given to borrowers from lower-income households, carried rates of 3.4 percent. Unsubsidized Stafford loans carried a 6.8 percent interest rate.

“I don’t understand why she gets more affordable loans than I will,” Dakota Friend said of the deal and its impact on her family. “Just because I happen to be younger than she is — that’s not fair,” the 16-year-old said during a conference call organized by U.S. PIRG.

James Kvaal, deputy director of the White House Domestic Policy Council, on Tuesday dismissed projected rates, arguing that they are “uncertain and they could be taken with a grain of salt.”

Administration officials stressed that while the rate may be higher in future years, the difference between the rate paid by student borrowers and interest rates in the broader economy will narrow from their present record levels.

While borrowers ranging from homeowners taking out a mortgage to corporate treasurers seeking to lower their funding costs have benefitted from the Federal Reserve’s efforts to reduce interest rates, students borrowing from the government have had to pay a fixed interest rate determined by Congress that has been unconnected to the economy.

For example, the average 30-year fixed-rate mortgage carried a 4.07 percent interest rate last month, according to government-backed mortgage financier Freddie Mac. Five years ago, the same type of mortgage had an average rate of 6.32 percent. The typical undergraduate borrower taking out an unsubsidized Stafford loan has been paying 6.8 percent the entire time.

“If you’re worried about the fairness of student loan interest rates, this year the federal government is borrowing at close to 2 percent on a 10-year bond, and is lending out at close to 7 percent,” Kvaal said. “So if you’re concerned about whether the question of whether students are paying a fair rate on student loans, this is a year where students need the relief most urgently.”

Still, U.S. PIRG sent a letter to Senate leaders on Tuesday urging them to vote against the proposal. Proponents need 60 votes to end debate and proceed to a majority vote, after which it would have to be reconciled with previously-approved legislation from the House of Representatives.

Duncan sought to tamp down criticism of the deal by stressing that the compromise proposal was just the “first step” in the administration’s efforts to attack student debt and college affordability. The Consumer Financial Protection Bureau estimates that U.S. households carry some $1.2 trillion in outstanding student debt, which policymakers from across the federal government have said may lead to lower economic growth as debt-strapped households curtail consumption and investment.

“This is simply about the cost of debt, and not about the debt itself,” Duncan said. “And that’s a much bigger issue that the president and I — many of us — are very concerned about.”

He added: “This is an important first step, but it is just simply the first step to figure out how we can significantly bring down the overall debt that students and families are having to incur to go to college. We worry a lot about the middle class being priced out of college.”

A Senate vote has been scheduled for Wednesday. It was unclear whether the deal had sufficient backing to pass, though it’s unlikely a vote would be scheduled without enough support. The administration said it hoped a vote would occur this week.

Representatives from each party gave different estimates. A congressional Democratic aide characterized 60 votes as an “uphill fight.” A senior Republican aide said he was confident the deal will have enough votes to pass, despite as many as eight Republicans likely to be voting against the measure.